ZHANG QIANDONG v. 寧波市美悅商貿有限公司

HCSD 2/2019

[2020] HKCFI 394

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO 2 OF 2019

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D E C I S I O N   O N   C O S T S

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1.  By consent, the statutory demand served by the respondent on the applicant was withdrawn. The applicant’s application for an order to set aside the statutory demand does not need to be determined on the merits, except for the question of costs. The parties have agreed that question to be dealt with on paper with written submissions from them. This is my decision on costs.

2.  The statutory demand was issued in respect of an amount of RMB16.3m allegedly payable by the applicant to the respondent pursuant to a written agreement in Chinese entered into between the applicant, the respondent, Fast Luck Global Ltd (“Fast Luck”) and one Mr Si Bo in December 2017 (“December Agreement”).

3.  In his affirmation filed on 8 January 2019, the applicant said he did not owe the respondent the sum of RMB16.3m or any part thereof.  He further relied on the arbitration agreement in clause 4 of the December Agreement, which provided as follows (in English translation):

“ This Agreement is governed by the laws of the Hong Kong Special Administrative Region of the People’s Republic of China (“Hong Kong”) and is to be interpreted in accordance with the laws of Hong Kong.  Any disputes, controversies, differences or claims, including the existence, validity, interpretation, performance, breach or termination of this Agreement, or any non‑contractual disputes caused by or related to this Agreement should be referred to arbitration administered by the Hong Kong International Arbitration Centre, and shall be finally resolved in accordance with the HKIAC Administered Arbitration Rules in force at the time when the notice of arbitration is submitted.  The place of arbitration should be Hong Kong.”

In the light of this provision, the applicant said the respondent could not and should not have presented any statutory demand against him and that any disputes between them should be resolved by arbitration.

4.  In his 2^nd affirmation filed on 4 February 2019, the applicant explained that the December Agreement arose from an underlying arrangement whereby the applicant and his father agreed in early 2017 to assist one Mr Zhang Weibing (“Zhang”) in such a way that Zhang would cause sums in Hong Kong dollars to be transferred to them, and they would in return cause sums in Renminbi to be transferred to accounts nominated by Zhang in the Mainland.  Pursuant to this arrangement, by the end of 2017, HK$25.4m had been transferred from Fast Luck (which was then held by Si Bo on behalf of Zhang) or others to the applicant (being HK$25.6m less $0.2m that the applicant paid to Si Bo on 20 August 2017), whereas the applicant had caused various entities, including the respondent which was then controlled by the applicant, to pay a total of RMB17m (approximately HK$19.1m) to Zhang’s nominated accounts.  An account was recorded in a “Summary” prepared by the applicant on around 15 December 2017.  In other words, as at December 2017, the applicant should repay Zhang a sum of HK$6.3m.

5.  The applicant further explained that by November 2017 the parties’ relationship had turned sour, and that he and his father wanted to extricate themselves from the investments related to Zhang.  One of the transactions envisaged for this purpose was the transfer of the applicant’s shareholding in the respondent to Si Bo.  The December Agreement was drawn up by and at the instigation of one Mr Hu Hongwei (a director and in‑house counsel of Titan Petrochemicals Group Ltd (“Titan”), a company of which Zhang was chairman at the time) for the accounting purposes of the respondent prior to its transfer to Si Bo.  Recital 2 of the December Agreement stated that Fast Luck had provided loans of HK$25.6m to the applicant.  Clause 2 stated that the applicant had repaid HK$0.99m.  Clause 3 provided that the applicant should, before 15 January 2018, pay the respondent HK$18.31m (equivalent to RMB16.3m) and pay Fast Luck HK$6.3m.

6.  The applicant said he did not owe the respondent RMB16.3m.  In fact, after the December Agreement was drawn up, he transferred sums totalling RMB16.3m to the respondent in 6 tranches on dates between 26 December 2017 and 2 January 2018, and then immediately caused the respondent to transfer RMB16.3m back to another entity.  The entire shareholding in the respondent was transferred to Si Bo (who was to hold it for Zhang) in January 2018.  The applicant said the respondent never demanded the sum of RMB16.3m from him until December 2018, which was done in retaliation for the steps taken by the applicant in removing Zhang from Titan as director and chairman.

7.  In response, the respondent filed an affirmation of Si Bo on 18 March 2019.  Si Bo said he was a friend of the applicant’s.  In around January 2017, the applicant said that he had some investment opportunities in Hong Kong and overseas but did not have sufficient capital, and requested Si Bo for a short‑term loan.  Si Bo therefore started lending money (in Hong Kong dollars) to the applicant via Fast Luck, and lent a total of HK$25.6m between January and April 2017.  He said that he had no knowledge of the money exchange arrangement alleged by the applicant, and that when the applicant mentioned to him that a friend of his father’s needed assistance to convert Renminbi into US dollars, he refused to offer any help and told the applicant not to get involved either.  Si Bo said that in the middle of 2017 he started asking the applicant for repayment of the loan, but he had only repaid HK$0.99m by December 2017.  Upon being chased, the applicant suggested repaying by paying Renminbi into the respondent’s bank account. Si Bo said the December Agreement was not drafted by him but provided by the applicant to him for signature, and that it was the applicant who came up with how the repayment of the outstanding loan was to be split into two sums.  He said that the applicant’s payments to the respondent between 26 December 2017 and 2 January 2018 should not be counted as performance of the December Agreement.

8.  The applicant filed his 3^rd affirmation on 30 May 2019 in reply to Si Bo’s affirmation.  Among other things, he exhibited a notice of arbitration dated 30 May 2019 he issued pursuant to clause 4 of the December Agreement. 

9.  The notice of arbitration was, as such, served on the respondent on 22 July 2019.  By letter dated 19 August 2019, the respondent indicated that it was prepared to withdraw the statutory demand for the dispute to be dealt with by way of arbitration.

10.  The parties filed a consent summons on 30 October 2019 for the respondent to withdraw the statutory demand and for the hearing of the applicant’s application in these proceedings to be vacated.

11.  The applicant now submits that the respondent should pay him the costs of these proceedings, to be taxed if not agreed.

12.  The respondent submits that the applicant should be ordered to pay the costs of the proceedings up to 22 July 2019 and that there should be no order as to costs thereafter.  It is submitted that the applicant has raised no bona fide dispute of the debt on substantial grounds, and that the respondent has only agreed to withdraw the statutory demand because of the existence of the arbitration, but the applicant only demonstrated a genuine intention to arbitrate when he served the notice of arbitration on the respondent on 22 July 2019.

13.  The principles guiding the exercise of the court’s discretion on costs where the substantive matter has been settled or withdrawn are not in dispute between the parties.  Among others, I have been referred to the decision of Coleman J in Re Lionstar Manufacturing Ltd [2019] HKCFI 1664; the decision of Au‑Yeung J in Famous Marvel Co Ltd & others v Conversant Group Ltd (unrep, HCA 2153/2009, 29 October 2012); the decision of Harris J in Re Lucky Ford Industrial Ltd [2013] 3 HKLRD 550; the decision of Deputy Judge Le Pichon in Re China Solar Energy Holdings Ltd (unrep, HCCW 108/2015, 1 March 2016); the decision of To J in Re Fook Lam Moon Restaurant Ltd (unrep, HCMP 438/2010, 8 December 2015); the decision of Deputy Judge William Wong SC in Perrine Chamonix Ltd v Star League Ltd (unrep, HCA 1139/2017, 13 September 2017); and a decision of my own in Re Smart Land Investment Ltd [2018] HKCFI 901.

14.  The principal consideration relevant in the present case seems to me to be that the applicant has substantially obtained what he sought in his application.  He wished to have the statutory demand set aside so that he would not be faced with a bankruptcy petition.  The result is now achieved: the statutory demand is withdrawn by the respondent itself who cannot therefore present a bankruptcy petition against the applicant.  I do not think the respondent has been able to put forward any valid reason why in these circumstances the applicant should not have his costs. 

15.  Consideration of the underlying merits, albeit on a broad‑brush manner appropriate in the present context, seems to me to fortify that conclusion.  In my view, leaving aside the arbitration clause, although the respondent’s claim was based on a written agreement (the December Agreement), the applicant has raised substantial matters which warrant exploration and investigation.  In particular:

(1)  It seems from the materials that Si Bo did appear to have a close working relationship with Zhang, contrary to his denial. There were also WeChat messages in which Zhang told the applicant’s father to contact Si Bo in relation to the matter regarding foreign exchange (ZQD-4).

(2)  There were WeChat exchanges between the applicant and Si Bo himself (eg ZQD-34) which appear to support the applicant’s evidence about the money exchange arrangement.

(3)  The contemporaneous “Summary” prepared by the applicant (albeit there is nothing to show that it was provided to Si Bo) shows receipts of exactly HK$25.6m in tranches corresponding to the sums that Si Bo said were loans advanced by him to the applicant.  The note at the bottom of the Summary shows that the Hong Kong dollar receipts were netted off against the Renminbi payments, resulting in a net debit of HK$6.3m at the exchange rate of RMB0.89 to HK$1.  This provides some support for the applicant’s version of the money exchange arrangement and that the sum of HK$25.6m was received by him pursuant to that arrangement.

(4)  It would be a strange arrangement for repayment of the loan from Si Bo or Fast Luck to be agreed to be made to the respondent at a time when the respondent was still within the applicant’s control.  In fact, on one view the applicant had indeed performed the December Agreement by paying RMB16.3m to the respondent prior to 18 January 2018, albeit the money was immediately transferred out from the respondent to a company called Zhoushan.  There was, however, nothing in the December Agreement to require that the money repaid by the applicant should remain in the coffers of the respondent pending the shareholding transfer to Si Bo.

16.  The court of course cannot and need not make any findings of fact in these circumstances, but I do not think the evidence given by the applicant could simply be brushed aside or said to be incredible in what would be a trial on affirmations.  Had the application not been dealt with by consent, it is in my view likely that the court would have come to the conclusion that there were sufficient grounds raised such that the statutory demand would have to be set aside.

17.  It is therefore unnecessary to deal with the additional point about the arbitration clause which, as the respondent accepts, is a further reason why the statutory demand should be set aside (although the respondent submits that this applies only as from the service of the notice of arbitration).

18.  There will therefore be an order that the respondent do pay the applicant the costs of these proceedings including the submissions on costs, to be taxed if not agreed.